LONDON (MktNews) - GDP growth is expected to slow further below trend in the second quarter, although economists warned that not too much should be read into a figure, which could be depressed by the outbreak of foot-and-mouth disease and is almost certain to be revised. A median calculated by Market News International sees the preliminary estimate of Q2 GDP rising by 0.3% on the quarter to stand 2% above levels a year earlier. Forecasts range from a quarterly gain of 0.1% to an increase of 0.5%.
Final estimates for Q1 GDP showed that growth was revised up slightly to 0.5% on the quarter and 2.7% on the year. In terms of the output-based measure of GDP, the service sector remained the economic driving force in Q1, rising by 0.9% on the quarter. One thing that is virtually assured in Q2 is that the manufacturing sector fell during the quarter. With two months of data from Q2 already known, declining output is set to place a significant drag on growth.
On the assumption that manufacturing production growth was flat in June, output would have fallen by 1.9% on the quarter in Q2. Although buoyant oil and gas output is likely to push up the wider measure of industrial production, a quarterly fall of around 1.1% would be consistent with zero growth in June. However, accounting for just over 66% of total economic output, the service sector holds the key to what happened to growth in the second quarter, and most economists expect to see a slowdown from the continued rapid expansion seen in the first quarter.
"Evidence from the CIPS purchasing managers' index and the British Chambers of Commerce suggests that the sector is unlikely to have maintained Q1's punchy rate of expansion of 0.9%," said Philip Shaw, chief economist at Investec. The CIPS services activity index fell to 52.3 in June from 53.3 in May, indicating slower growth. The BCC economic survey for Q2 also showed both sales and orders sliding.
Shaw has pencilled in a 0.6% rise in service-sector output on the quarter. "The key factor will be the impact of foot-and-mouth disease on tourism and distribution," Shaw said. Economists said that the overall impact of the foot-and-mouth crisis on Q2 GDP was hard to gauge, but noted that it was likely to shave around 0.1-0.2 percentage points off the quarterly growth rate.
John Butler, UK economist at HSBC, said, "Some indicators are being weighed down by foot-and-mouth but others are going upwards." He noted that the recent strong outturns for retail sales growth could have been boosted by the outbreak. One area that the foot-and-mouth outbreak will have a direct impact on is the agricultural sector. Although this only accounts for 1.8% of total GDP, a large fall could have a downward impact on overall economic growth.
"Foot-and-mouth is almost certain to have triggered a drop in agriculture output, though by how much is uncertain. The start of the BSE crisis in Q2 1996 witnessed a 5% fall in production, though for this release we have pencilled in a more modest correction of 2%," said Shaw. Construction output is expected to show a modest gain over the quarter.
Although overall GDP growth is expected to fall further below trend in the second quarter, economists warned that the preliminary estimate is not a reliable figure and is subject to later revision. Butler noted that over the past two years, the preliminary estimate of growth has on average tended to be revised 0.2 percentage points higher. Also, given the uncertainty over the impact of the foot-and-mouth crisis, Butler said that the Monetary Policy Committee is more likely to be interested in what happened to growth in the third quarter.
He believes that growth will remain weak and expects the MPC to cut the repo rate towards the end of the year, after the Q3 figures are known. Shaw, who is forecasting a below median quarterly rise of 0.1% in overall GDP, believes growth will pick up again towards trend in the second half of the year. However, he noted that if his forecast proves correct, it would quash any speculation of a near-term hike in rates. Shaw expects rates to remain on hold at 5.25% this year. The preliminary GDP data will be released on Friday, July 27, at 08:30 GMT.